nifty is almost 40% down from the high and dont ask about the sector specific stock like realty sector It is down about 70%!!! I know now a days who all are remain invested since the peak of market dont want to look into their portfolio......... Out of sight out of mind this simple psychology works here...
But the main point is when market started cracking we should have behaved like a fearful person. At least by acting fearfully and getting out of the market on the first run had saved our hard earned money.
Imagine If you are in the jungle alone with no arms to defend youself and suddenly you have the feeling that there might be a predator here what you will do ----- will you wait for the predator to come out from the bush when you get confirmed yes he is there then you run away? certainly not you wont wait for a moment to confirm that you will on run for your life without confirming about the predator. After all cost of runing even there is no predator is less then that of you only run when yo got confirmed he is there is very less.
So on the line of this natural fearful human behaviour we should have get out of the market when it was started slipping without waiting for the confirmation that yes certainly there is something wrong with the economy.....................
Monday, September 22, 2008
Sunday, September 21, 2008
Are You Lazy Thinker
A very good article It has enlighten my thought process....... superb......................
Few things make more of a difference in investing than thought process. Unlike most competitions, the primary battleground for investing is the mind. Investors must deal with an obstacle course of emotions, psychology, temperament, and other forces acting to overwhelm rational thought...................
Investing incentives are such that everyone plays the game with the intention of maximizing his or her wealth. Thus when people ask how to become a better investor, I often wonder how they feel about improving their thought process.
Without conscious effort our mind drifts towards weak thinking. Rarely do we, in good faith, see the opposing side of an argument. Of course we see the flaws in the argument.
If someone tells me that that Buffett was not the best investor over the last 40 years my initial reaction is what the heck are you smoking? Immediately my mind jumps to the flaws in his argument rather than trying to actually understand the opposing argument. I have prejudged this argument in my mind.
The inability to change your mind, destroy your ideas, or learn new mental-models will ensure that you are not constant winner in investing. Unable to discern the difference between a logical and illogical argument you will fall victim to sophists. According to Wikipedia, a sophism is a confusing or illogical argument used for deceiving someone. This means, in a sense, you will fall victim to arguments regardless of whether there are obvious flaws in the thinking behind them.
Strong thinkers, on the other hand, tend to be open-minded. Despite the natural desire to ignore opposing viewpoints, they seek to understand the arguments of others. It’s impossible to make informed decisions without a complete understanding of the opposing point of view. Understanding your opponents viewpoint better than him, according to Charlie Munger, ensures you make informed decisions.
Intellectual humility ensures you know what you do not. In investing circles, this is often referred to as circle of competence. Are you aware of all of your own false beliefs, prejudices, illusions, myths? Do you know how your mind goes about self-deception? Admitting your lack of knowledge in an area is very humbling. It helps ensure that beliefs can no longer be cemented in your head, but rather held only until contrary information appears. This all sounds very simple and it is. But, as Buffett teaches us, simple does not mean easy.
How often have you watched the news and made up your mind about some suspected criminal? I can’t count the number of times I have heard the tale of a graphic murder or rape and thought horrible things about the person held in custody. Yet this person is a suspect, convicted of nothing. Overcome by the graphic and often egregious nature of the crimes, my mind has rushed to form a judgment without any evidence. Only after taking a step back do i realize the error in my thinking.
Making snap-judgments without understanding the other side of an argument is weak thinking. Unfortunate as it may be, this thought process is easily rationalized and further cemented in our head. For example, in the case mentioned above, suppose the suspect turns out to be guilty – now the next time I come across a similar pattern in life I can easily recall the last time I made a snap judgment in a similar situation and I was right. This leads to overconfidence.
According to Richard W. Paul and Linda Elder, authors of Critical Thinking: Tools for Taking Charge of Your Professional and Personal Life, the opposite of confidence in reason is intellectual distrust of reason, given by the threat that reasoning and rational analysis pose to the undisciplined thinker. Often volatility in stock markets is an emotional reaction from people who are not, at the time, using their strong thinking skills. Being prone toward emotional reactions that validate present thinking, people often express little confidence in reason.
A great example of how this can be used to manipulate us is by creating a culture where it’s difficult to argue with a point of view for emotional reasons. Consider the war in Iraq. If you denounce it you are no longer a patriot. If you question it you are no longer a patriot. The fear or war and terrorism plays with your head and you no longer think rationally and emotions take over. Consider our post on where the US spends money. It is infinitely more likely as an American you will die because of (presumably curable) cancer than a terrorist attack. Yet the government spends pennies on cancer while allocating trillions toward war efforts. Politics aside, is that rational?
In order to become a stronger thinker you have to challenge your existing beliefs. Or, inverted, in order to become a weaker thinker you must never challenge any of your beliefs. Sounds harsh doesn’t it? Can you identify one belief that you hold that might be wrong or questionable at best? It might be something simple like Starbucks has the best coffee. Buddhism is the best religion.
Are you willing to hold a different opinion in the face of adversity? The Asch conformity experiments suggest that this might be more difficult than we think. Peer pressure (social influence) plays a large role in how we behave and make decisions.
A new book, The opposable mind, suggests that rather than focusing on what successful leaders do we need to emulate and understand how they think. The author, Roger Martin, argues that integrative thinking is necessary. Martin describes this as creatively resolving the tension in opposing models by forming entirely new and superior ones. I see this as being able to hold opposing views in your mind at the same time.
Think to the last board meeting you attended at work. Remember that project being presented? When the presenter was light up with questions at the end did she distort the questioner’s point of view? Try reading a split decision handed down from the Supreme Court. ( Canadian and American Supreme Court decisions).Can you follow both opposing sides of the arguments? Or do you tend to agree with one side and discount the other side of the argument? What about a stock? Can you identify and understand both the bull and the bear case for a particular company? Can you follow both sides of an argument and yet, still have no opinion?
I used to identify flaws in corporate presentations and think to myself “wow, I’d never say that!” or “he really didn’t think that problem through”. Then I realized that I make all of these mistakes as well. You could call my behavior intellectual hypocrisy. As we noted in our presentation it’s relatively easy to think up the correct models, however implementing them is the challenge. (Checklists help. Imagine a pilot without a checklist!).
In a similar way, my lazy thinking was ensuring I didn’t act according to my beliefs. This can, and will, easily destroy your credibility. I find myself questioning certain policies that reward people for the right outcome rather than thought process, yet I am guilty of the same error on occasion. ( As I have learned, there is a huge difference between being right for the right reasons and right for the wrong reasons. Being right for the wrong reasons and having this behavior rewarded will eventually lead to horrible outcomes for horrible reasons. Try explaining those to your shareholders).
Do you see hypocrisy in your friends or a group you are a member of? Can you identify any instance where you don’t practice what you preach? Often I advise others that they should do what they love; yet I find it incredibly difficult to do that myself. I always have an easy rationalization to grasp onto should someone ask my why I’m not a full time business analyst (on that note, if anyone has a business analyst job open where I can telecommute please let me know!)
Are you a lazy thinker? It’s so easy for me to come up with examples of how lazy am in thinking that I’m embarrassed. One example is university physics. Bombarded with formulas that were both complex and frustrating I looked for an easy way out and found one. Another example, one where several of these weak thinking traps aggregated into an irritating experience, is attempting to read through a modern finance book. Not only does my mind, naturally want to not believe most of the information in the book, it finds the formulas needlessly complex. My eyes start to gloss over and my mind gets lazy – very lazy. I rationalize this behavior because I think, if these textbook authors are so smart, why are they writing textbooks! Then I realize that I need to understand the opposing viewpoint as frustrating and time consuming as that may be. Intellectual perseverance is often a good thing (and occasionally not!).
Can you stand alone in your thinking? Buffett puts it another way, ‘You’re neither right nor wrong because other people agree with you. You’re right because your facts are right and your reasoning is right - that’s the only thing that makes you right. And if your facts and reasoning are right, you don’t have to worry about anybody else.’ Having the intellectual ability to lack dependence on others for thinking or reasoning is an enormous advantage that can, if used correctly, lead to outperforming markets and, more importantly, increase the quality of your life.
I can say with a reasonably amount of certainty that at some point or another we all fall victim to the intellectual traps mentioned above. The traits of weak thinking are merely dimensions of our mind at work. It would be just as easy for me to give examples of where following these weak thinking practices paid off in spades for me (these are not habits I want reinforced).
On the surface, setting out to improve your thinking is a laudable goal that seems easy. Mentioning some of the above traits of weak thinking was also relatively easy – consciously attempting to change your thinking habits, recognizing your limitations, and knowing when you are deceiving yourself is rather difficult. Finding great thinkers and learning more about how they make decisions is one of my goals for 2008. Just yesterday, I caught myself in a meeting, wondering what Charlie Munger would say to a presentation like this and spontaneously chuckled out loud just a little.
Few things make more of a difference in investing than thought process. Unlike most competitions, the primary battleground for investing is the mind. Investors must deal with an obstacle course of emotions, psychology, temperament, and other forces acting to overwhelm rational thought...................
Investing incentives are such that everyone plays the game with the intention of maximizing his or her wealth. Thus when people ask how to become a better investor, I often wonder how they feel about improving their thought process.
Without conscious effort our mind drifts towards weak thinking. Rarely do we, in good faith, see the opposing side of an argument. Of course we see the flaws in the argument.
If someone tells me that that Buffett was not the best investor over the last 40 years my initial reaction is what the heck are you smoking? Immediately my mind jumps to the flaws in his argument rather than trying to actually understand the opposing argument. I have prejudged this argument in my mind.
The inability to change your mind, destroy your ideas, or learn new mental-models will ensure that you are not constant winner in investing. Unable to discern the difference between a logical and illogical argument you will fall victim to sophists. According to Wikipedia, a sophism is a confusing or illogical argument used for deceiving someone. This means, in a sense, you will fall victim to arguments regardless of whether there are obvious flaws in the thinking behind them.
Strong thinkers, on the other hand, tend to be open-minded. Despite the natural desire to ignore opposing viewpoints, they seek to understand the arguments of others. It’s impossible to make informed decisions without a complete understanding of the opposing point of view. Understanding your opponents viewpoint better than him, according to Charlie Munger, ensures you make informed decisions.
Intellectual humility ensures you know what you do not. In investing circles, this is often referred to as circle of competence. Are you aware of all of your own false beliefs, prejudices, illusions, myths? Do you know how your mind goes about self-deception? Admitting your lack of knowledge in an area is very humbling. It helps ensure that beliefs can no longer be cemented in your head, but rather held only until contrary information appears. This all sounds very simple and it is. But, as Buffett teaches us, simple does not mean easy.
How often have you watched the news and made up your mind about some suspected criminal? I can’t count the number of times I have heard the tale of a graphic murder or rape and thought horrible things about the person held in custody. Yet this person is a suspect, convicted of nothing. Overcome by the graphic and often egregious nature of the crimes, my mind has rushed to form a judgment without any evidence. Only after taking a step back do i realize the error in my thinking.
Making snap-judgments without understanding the other side of an argument is weak thinking. Unfortunate as it may be, this thought process is easily rationalized and further cemented in our head. For example, in the case mentioned above, suppose the suspect turns out to be guilty – now the next time I come across a similar pattern in life I can easily recall the last time I made a snap judgment in a similar situation and I was right. This leads to overconfidence.
According to Richard W. Paul and Linda Elder, authors of Critical Thinking: Tools for Taking Charge of Your Professional and Personal Life, the opposite of confidence in reason is intellectual distrust of reason, given by the threat that reasoning and rational analysis pose to the undisciplined thinker. Often volatility in stock markets is an emotional reaction from people who are not, at the time, using their strong thinking skills. Being prone toward emotional reactions that validate present thinking, people often express little confidence in reason.
A great example of how this can be used to manipulate us is by creating a culture where it’s difficult to argue with a point of view for emotional reasons. Consider the war in Iraq. If you denounce it you are no longer a patriot. If you question it you are no longer a patriot. The fear or war and terrorism plays with your head and you no longer think rationally and emotions take over. Consider our post on where the US spends money. It is infinitely more likely as an American you will die because of (presumably curable) cancer than a terrorist attack. Yet the government spends pennies on cancer while allocating trillions toward war efforts. Politics aside, is that rational?
In order to become a stronger thinker you have to challenge your existing beliefs. Or, inverted, in order to become a weaker thinker you must never challenge any of your beliefs. Sounds harsh doesn’t it? Can you identify one belief that you hold that might be wrong or questionable at best? It might be something simple like Starbucks has the best coffee. Buddhism is the best religion.
Are you willing to hold a different opinion in the face of adversity? The Asch conformity experiments suggest that this might be more difficult than we think. Peer pressure (social influence) plays a large role in how we behave and make decisions.
A new book, The opposable mind, suggests that rather than focusing on what successful leaders do we need to emulate and understand how they think. The author, Roger Martin, argues that integrative thinking is necessary. Martin describes this as creatively resolving the tension in opposing models by forming entirely new and superior ones. I see this as being able to hold opposing views in your mind at the same time.
Think to the last board meeting you attended at work. Remember that project being presented? When the presenter was light up with questions at the end did she distort the questioner’s point of view? Try reading a split decision handed down from the Supreme Court. ( Canadian and American Supreme Court decisions).Can you follow both opposing sides of the arguments? Or do you tend to agree with one side and discount the other side of the argument? What about a stock? Can you identify and understand both the bull and the bear case for a particular company? Can you follow both sides of an argument and yet, still have no opinion?
I used to identify flaws in corporate presentations and think to myself “wow, I’d never say that!” or “he really didn’t think that problem through”. Then I realized that I make all of these mistakes as well. You could call my behavior intellectual hypocrisy. As we noted in our presentation it’s relatively easy to think up the correct models, however implementing them is the challenge. (Checklists help. Imagine a pilot without a checklist!).
In a similar way, my lazy thinking was ensuring I didn’t act according to my beliefs. This can, and will, easily destroy your credibility. I find myself questioning certain policies that reward people for the right outcome rather than thought process, yet I am guilty of the same error on occasion. ( As I have learned, there is a huge difference between being right for the right reasons and right for the wrong reasons. Being right for the wrong reasons and having this behavior rewarded will eventually lead to horrible outcomes for horrible reasons. Try explaining those to your shareholders).
Do you see hypocrisy in your friends or a group you are a member of? Can you identify any instance where you don’t practice what you preach? Often I advise others that they should do what they love; yet I find it incredibly difficult to do that myself. I always have an easy rationalization to grasp onto should someone ask my why I’m not a full time business analyst (on that note, if anyone has a business analyst job open where I can telecommute please let me know!)
Are you a lazy thinker? It’s so easy for me to come up with examples of how lazy am in thinking that I’m embarrassed. One example is university physics. Bombarded with formulas that were both complex and frustrating I looked for an easy way out and found one. Another example, one where several of these weak thinking traps aggregated into an irritating experience, is attempting to read through a modern finance book. Not only does my mind, naturally want to not believe most of the information in the book, it finds the formulas needlessly complex. My eyes start to gloss over and my mind gets lazy – very lazy. I rationalize this behavior because I think, if these textbook authors are so smart, why are they writing textbooks! Then I realize that I need to understand the opposing viewpoint as frustrating and time consuming as that may be. Intellectual perseverance is often a good thing (and occasionally not!).
Can you stand alone in your thinking? Buffett puts it another way, ‘You’re neither right nor wrong because other people agree with you. You’re right because your facts are right and your reasoning is right - that’s the only thing that makes you right. And if your facts and reasoning are right, you don’t have to worry about anybody else.’ Having the intellectual ability to lack dependence on others for thinking or reasoning is an enormous advantage that can, if used correctly, lead to outperforming markets and, more importantly, increase the quality of your life.
I can say with a reasonably amount of certainty that at some point or another we all fall victim to the intellectual traps mentioned above. The traits of weak thinking are merely dimensions of our mind at work. It would be just as easy for me to give examples of where following these weak thinking practices paid off in spades for me (these are not habits I want reinforced).
On the surface, setting out to improve your thinking is a laudable goal that seems easy. Mentioning some of the above traits of weak thinking was also relatively easy – consciously attempting to change your thinking habits, recognizing your limitations, and knowing when you are deceiving yourself is rather difficult. Finding great thinkers and learning more about how they make decisions is one of my goals for 2008. Just yesterday, I caught myself in a meeting, wondering what Charlie Munger would say to a presentation like this and spontaneously chuckled out loud just a little.
Beware Of Blind Contrarian
Many people when most of wall street financial stocks came down to mouth watering prices they bought them thinking like they are making wise decision or following the principle of contrarian investment style, but sadly they are not.. Here is the link of an article you should not be a blind contrarian on the street............enjoy the reading....
http://streetcapitalist.com/2008/04/07/beware-of-blind-contrarianism/
http://streetcapitalist.com/2008/04/07/beware-of-blind-contrarianism/
How Thinking Costs You
Behavioral Economics Shows That When It Comes to Investing, People Aren't That Smart
Article on behaviour finance, interesting...
http://www.washingtonpost.com/wp-dyn/content/article/2008/05/24/AR2008052400002.html
Article on behaviour finance, interesting...
http://www.washingtonpost.com/wp-dyn/content/article/2008/05/24/AR2008052400002.html
Friday, September 19, 2008
How can a bank like Lehman go down so fast
The Reason behind faliure of Lehman Brothers:-
It is overleveraged i.e loan and investment books are much bigger then the capital. Loans were of high risk nature.
.Lehman was buying loan from banks and then package them to sell as bond against the loan. suppose earning on the loan is 6% and bonds are sold at 4% then spread is the earning for investment bank. By selling these bonds it raises money and frees capital.
But when home buyers started defaulting these bonds lost there value. Suppose Lehman faces a redemption and has to repay another bank it has borrowed from.If it sells the mortgage-backed bonds, whose prices have fallen, it will not raise as much as was earlier expected.So, it sells some of the other good assets or bonds which may have nothing to do with mortgages.But since the bank starts dumping these assets, prices of these bonds also dip.This is when the crisis spreads from subprime to prime.
Lehman ws also writer of huge CDs ( credit default swaps). There are collateralised debt obligation (CDOs), credit default swaps (CDSs) and all kinds of derivatives. CDOs are asset (or loan)-backed securities, while CDSs are like a guarantee.Say Bank A lends to a corporate but is unwilling to take the full credit risk. So, Bank A enters into a CDS deal with Bank B; under this, Bank B promises to pay Bank A if the corporate defaults. The money that Bank B earns for this is the CDS premium, which is similar to an insurance premium.Now, if markets turn choppy, risks go up and so does the CDS premium. So, Bank B, which is earning a lower premium has to promote a mark-to-market loss against the CDS position. Here bank B is Lehman. When default on housing loan is mounting the Lehman were suffering huge losses. Because they have never thought that housing prices ever come down. strange!!!
It is overleveraged i.e loan and investment books are much bigger then the capital. Loans were of high risk nature.
.Lehman was buying loan from banks and then package them to sell as bond against the loan. suppose earning on the loan is 6% and bonds are sold at 4% then spread is the earning for investment bank. By selling these bonds it raises money and frees capital.
But when home buyers started defaulting these bonds lost there value. Suppose Lehman faces a redemption and has to repay another bank it has borrowed from.If it sells the mortgage-backed bonds, whose prices have fallen, it will not raise as much as was earlier expected.So, it sells some of the other good assets or bonds which may have nothing to do with mortgages.But since the bank starts dumping these assets, prices of these bonds also dip.This is when the crisis spreads from subprime to prime.
Lehman ws also writer of huge CDs ( credit default swaps). There are collateralised debt obligation (CDOs), credit default swaps (CDSs) and all kinds of derivatives. CDOs are asset (or loan)-backed securities, while CDSs are like a guarantee.Say Bank A lends to a corporate but is unwilling to take the full credit risk. So, Bank A enters into a CDS deal with Bank B; under this, Bank B promises to pay Bank A if the corporate defaults. The money that Bank B earns for this is the CDS premium, which is similar to an insurance premium.Now, if markets turn choppy, risks go up and so does the CDS premium. So, Bank B, which is earning a lower premium has to promote a mark-to-market loss against the CDS position. Here bank B is Lehman. When default on housing loan is mounting the Lehman were suffering huge losses. Because they have never thought that housing prices ever come down. strange!!!
Saturday, September 13, 2008
Quote of the week
“Much success can be attributed to inactivity. Most investors cannot resist the temptation to constantly buy and sell.”- Warren E. Buffett
Quote From Warren Buffett
Rule No.1 is never lose money. Rule No.2 is never forget rule number one.
""Shares are not mere pieces of paper. They represent part ownership of a business. So, when contemplating an investment, think like a prospective owner.""
All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies."
"Look at market fluctuations as your friend rather than your enemy. Profit from folly rather than participate in it."
"If, when making a stock investment, you're not considering holding it at least ten years, don't waste more than ten minutes considering it."
""Shares are not mere pieces of paper. They represent part ownership of a business. So, when contemplating an investment, think like a prospective owner.""
All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies."
"Look at market fluctuations as your friend rather than your enemy. Profit from folly rather than participate in it."
"If, when making a stock investment, you're not considering holding it at least ten years, don't waste more than ten minutes considering it."
Wednesday, September 10, 2008
Today's call on fundamental basis
Buy HPCL, BPCL, IOC for 3-4 months crude oil is going to fall in coming month because higher crude price will not only harm the oil consumer but oil producing country too in a big way If you can link growth, inflation, consumption and currecy exchange rate of different countries with crude oil price....... Crude oil has to be stablized between 60-70 $/barrel in coming 4-6 months.......So we dont need rocket science to understand whic companies will get benifited......
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